Briefing: Luckin Coffee files for US IPO

Luckin Coffee is a coffee company best known as the one-year-old challenging Starbucks in China. The homegrown startup has now filed for an IPO in the United States, as it races to open more outlets than its Seattle-based competitor. Here’s what we know.

The news that Luckin Coffee, which is known as Ruixing in Chinese, has filed paperwork with US regulators comes just days after it announced an additional $150m from investors including Blackrock, bringing the total valuation of the company up to $2.9bn. However, the filing does not reveal how many shares could be sold, or what they would be worth.

Growth

Within the Luckin Coffee story, one American competitor, Starbucks, looms large. The US company currently runs 3,300 locations in China, according to the Financial Times. In order to keep up, Luckin says it plans to open between 200 and 300 outlets every month, which would make it the larger chain by store footprint.

What is staggering about Luckin Coffee’s rise is its sheer speed. It was only founded in October 2017 and launched officially in January 2018. As of the end of March, it now operates more than 2,370 stores in 28 cities across the country.

It is now a major contender in China’s $3.2bn retail coffee market.

However, that growth has come at a cost. An analysis by Crunchbase details how the company has not been able to bring its losses to under 100% of its revenue at any point in its existence. Its growth has relied heavily on expensive customer acquisition strategies such as offering delivery and steep discounting.

“China is Starbucks’ best and most profitable market now, but it took them nine years of making huge losses. We will be faster than that,” said Luckin’s chief strategy officer, Reinout Schakel, in an interview with Bloomberg.

Chic

Currently, Starbuck’s core offer in China is its brand. It was more or less responsible for introducing the country to coffee on a broad scale and has leveraged that position in the traditionally tea-drinking country effectively. Lately, Starbucks has struggled similarly in both of its largest markets, China and the US, with sales growth dropping, according to Axios. In the US it was able to raise prices, but in China, where it is already the expensive option, price hikes in the face of new homegrown companies leave it even more exposed to being undercut.

Starbucks’ coolness is a difficult commodity to emulate, but it wouldn’t be the first western company to suffer at the hands of a local competitor that can ultimately show that it understands this complex country better.

The economics of coffee

Retail coffee is quite simple really: growth in the category is driven by the number of stores, hence the arms race for store space. In an IPA paper exploring the effect of communications on Starbucks’ sales in the UK, the authors detail how size matters when it comes to coffee.

In many parts of the world, the UK included, the trend of coffee shops is relatively new – the difference in China is just that it’s extremely new – but that doesn’t mean that consumers don’t adapt quickly.

Convenience is Luckin’s main offer, and it has touted its delivery credentials. According to the company, Reuters reports, customers can order coffee through an app, watch a livestream of its making, and have it delivered in an average of 18 minutes. Though many of Luckin’s stores are larger “relax” stores that emulate Starbucks’ third-place experience of luxuriating over a coffee while getting other stuff done, just under half of its stores are either pick-up stores with little to no seating or delivery kitchens. It is designed with speed and convenience in mind, whereas Starbucks has had to pivot to delivery.

It appears that Luckin sees the coffee industry as an analogue of dominance-focused tech outfits, such as ride hailing, which tends toward a monopoly in the market. However, it only enjoys 2.1% of China’s specialist coffee and tea shop market, according to Euromonitor (via the FT), compared to over half for Starbucks.

Either way, coffee is going to be really big in China, with Mintel estimating that the country will have 74,000 coffee shops by 2020. Commenting on the finding, Belle Wang, a research analyst at Mintel, noted how the research showed “that more on-premise coffee users get their coffee from convenience stores than from traditional chain coffee houses. This is perhaps due to Chinese consumers associating convenience stores with a full range of breakfast options.

“Convenience stores are also viewed as easily accessible and affordable.”

Starbucks, a coffee company and coffeehouse chain, engaged with UK customers by launching a social media campaign across a number of years, which saw it make its cups an icon and launch a series of events.

All rights reserved including database rights. This electronic file is for the personal use of authorised users based at the subscribing company's office location. It may not be reproduced, posted on intranets, extranets or the internet, e-mailed, archived or shared electronically either within the purchaser's organisation or externally without express written permission from WARC.

Email this content

Send colleagues a link to this content.
To send to more than one recipient, put a comma between email addresses.